Wednesday, January 19, 2011

Goldman Sachs, tax shelters and Schrödinger's cat

The Naked Capitalism blog has written a short article on Goldman Sachs, which is about CDOs, but is extremely pertinent in the field of international tax. This is about Goldman's 'truthiness' on whether or not what Goldman was doing was legal.

"Goldman sees that securities regs operate in the world of Schrodinger’s cat, where legality is in an indeterminate state until someone takes the trouble to look. And that remains true of what happened during much of the crisis. Tom Adams and I have written long form of the abuses that took place in CDOs, including probable market manipulation, lack of arm’s length pricing, and collusion by CDO managers, and we have argued separately that CDOs were the driver of the toxic phase of the subprime bubble. But no one seems willing to go there because the forensic work looks to be too daunting."

That will look familiar to any tax inspector who has taken a transfer pricing case against a multinational to court. And it touches on a question that's often asked: is transfer mispricing illegal? To which the answer is: it is usually in a grey area - and you only finally find out which side a particular deal is on after a court ruling. And tax administrations, particularly in developing countries, find it especially daunting to take on multinationals and their armies of lawyers and accountants. Note, again, that comment

"no one seems willing to go there because the forensic work looks to be too daunting."

Indeed. This is a nice way of looking at the problem of transfer pricing: the Schrödinger's cat problem.

Note that this even includes the term 'arm's length pricing' - which we believe isn't entirely being talked about here in a tax context - but is central to the whole transfer pricing industry: a system that the OECD jealously guards and which urgently needs change - as we argue in detail here.

2 Comments:

Transfer pricing is a good example of the problems caused when companies are the subject of taxation.

It could be largely choked off at source by making land the subject of taxation. Most of these companies own or occupy valuable land in order to function and their revenue is composed of economic rent of land. If it is picked up at source then there is little they can "transfer" to low-tax paradise islands. And the untaxed profits are then distributed and used largely for land purchase, which again can be taxed directly.

The other major source is monopoly profits arising from patents but there would be no such profits if governments did not hand out the monopoly on a plate.

We are victims of the notion that taxes should be related to ability to pay, when those with the greatest ability can pay to avoid these taxes.

Thanks Jeremy.I think you mean 'thereafter' rather than 'therefore' at the start of your second sentence.

My point is that although such a scheme may work for footballers it would not work for people running their own companies as the tax on the notional interest (the deemed 'benefit in kind' (BIK) would continue for years.

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The Tax Justice Network (TJN) is an international, non-aligned network of researchers and activists with a shared concern about the harmful impacts of tax avoidance, tax competition and tax havens.
www.taxjustice.net